Markets WRAP: The rand closed at R13.90/$

The rand closed at R13.90 to the greenback on Thursday afternoon.

The day's range was between R13.88 to R14.04.

The SA Reserve Bank announced earlier that it had decided to cut interest rates by 25bps from 6.75% to 6.50%.

Sterling volatility is getting a shake-up as the risk of the UK crashing out of the European Union grows. Measures of expected pound swings over the next three and six months, covering the run-up to and the aftermath of the October 31 Brexit deadline, have surged to the highest among Group-of-10 currencies.

The gauges may still climb, being well short of the levels ahead of the original March deadline. UK Brexit Secretary Steve Barclay said no-deal risks are “underpriced,” while the EU’s chief negotiator Michel Barnier said the UK would “have to face the consequences” under such a scenario.

Sterling Swings

The pound is bucking a trend of almost unprecedentedly low volatility in the multi-trillion-dollar-a-day market for foreign exchange, as it mirrors the twists and turns of the Brexit saga. Bets on swings are more in line with emerging-market currencies such as the Mexican peso and Brazilian real, given the myriad of political risks that could drive a sharp move.

“With the October 31 deadline about to enter the three-month expiry window, the options market is pricing in the expectation of higher and higher volatility ahead of that expected cliff-edge,” said Ned Rumpeltin, the European head of currency research at Toronto Dominion Bank.

While the pound climbed Thursday, the currency and its volatility had been in decline since Prime Minister Theresa May announced her resignation as party leader in May following her failure to get a deal with Brussels through Parliament. Both prime ministerial contenders Boris Johnson and Jeremy Hunt have said they would take the UK out of the bloc if no deal could be reached, and this week toughened their rhetoric.

Three-month implied sterling-dollar volatility touched 8.75% Thursday, the highest since April. The six-month gauge was at 9.15%, nearly 200 basis points above the year’s low. By contrast JPMorgan’s Global FX Volatility Index is hovering near record lows. Given what’s at stake if Britain broke away without a deal, sterling volatility ought to be much higher according to Esther Reichelt, a currency strategist at Commerzbank AG. Reichelt pointed to the surge in volatility in the run up to the Brexit deadline of March 29 when a similar gauge jumped to an 18-month high.

“That shows that the majority of market participants is speculating on a further extension - and most likely further negotiations, which could push the actual decision on what kind of Brexit to expect further into the future,” Reichelt said. “The market does still see predominant pound-idiosyncratic risks but in my opinion might still be too optimistic about how these risks will eventually play out.” - Bloomberg

Oil rises after Iran confirms it seized fuel tanker in the Gulf

Alex Longley, Bloomberg

Oil extended gains after Iran confirmed it had seized a foreign oil tanker in the Persian Gulf earlier this week.

Brent crude gained as much as 1.3%, reversing some of the heavy losses the global benchmark suffered in the previous two sessions.

Iran’s Revolutionary Guards said it captured a foreign vessel on July 14 alleged to be smuggling 1 million litres of fuel in the Persian Gulf, according to state-run Press TV news channel. It was unclear whether the report was referring to the Riah, a small ship that entered Iranian waters and stopped transmitting its location around the same time.

Oil has fallen this week as the spectre of a renewed US-China trade conflict dents the demand outlook, while US fuel stockpiles jumped.

Still, the possibility of crude flows being disrupted from the Middle East remains in focus after Iran’s Foreign Minister Mohammad Javad Zarif said his country was capable of shutting crucial oil-shipping route the Strait of Hormuz, but is unwilling to do so.

European, Asian stocks drop on earnings, trade angst

Bloomberg 

Stocks fell in Europe and Asia alongside US equity futures amid deepening concerns about the outlook for corporate earnings and global trade. The dollar slipped while Treasuries were steady.

The JSE ALL-Share index was even at 11:05. 

The Stoxx Europe 600 dropped for a second day as profit warnings or sales declines from software giant SAP, fashion retailer Asos and Swiss watchmaker Richemont spooked investors.

In Asia, a Tokyo benchmark fell 2.1% amid reports that Canon's operating profit could slump 40% this year. Hong Kong, Shanghai, Seoul and Sydney saw more modest declines. Nasdaq futures fell after Netflix’s surprise loss of US customers last quarter sent its shares down after hours.

WTI oil slipped for a fourth day, trading below $57 a barrel in New York. The yen strengthened to a three-week high amid trade tensions between Japan and South Korea, with the latter reportedly finalizing countermeasures against Tokyo’s plan to remove it from a list of trusted export countries. The pound rose amid hopes for a Brexit compromise stemming from a new Irish border plan.

Diamond industry awash with gems prompts De Beers to cut output

Thomas Biesheuvel, Bloomberg 

De Beers trimmed its production plans for this year as the world’s biggest diamond producer responds to a brewing industry crisis that’s hitting demand for its stones.

The Anglo American unit will now mine about 31 million carats in 2019, at the bottom end of a previous forecast range.

The company, once the monopoly supplier of diamonds, has a longstanding strategy to match supply with demand. The diamond industry’s engine room, dominated by family-run businesses that cut, polish and trade the stones, is struggling to make money amid a flood of polished diamonds and stagnant consumer purchasing.

That’s led to a slump in demand for the rough stones that De Beers mines from Botswana to Canada.

The weakness is showing up in the company’s sales, which are down about $500m so far this year compared with 2018. The company has already gone unusually far in offering flexibility for its customers - allowing them to defer agreed purchases and lower the number of diamonds they plan to buy this year.

De Beers had already planned to produce a lot less diamonds than last year, when it dug up more than 35 million carats, the most since the global financial crisis. First-half output of the stones was 15.6 million carats, 11% lower than in 2018.

The average selling price also fell 7%.

“Demand for rough diamonds remains subdued as a result of challenges in the midstream, with higher polished inventories, and caution due to macro-economic uncertainty, including the US- China trade tensions,” Anglo said Thursday.

Macquarie Group said before today’s announcement that it expects De Beers to post first-half profit of $567 million. While that’s down on last year, it’s performing far better than its smaller rivals, many of whom have seen their market values plummet to multi-year lows.

Prospect of rate cuts stirs hope for retail stocks

Bloomberg

It’s been a tough year for South African retail stocks, battered by gloomy economic news. But hope is on the way.

The SA Reserve Bank is expected to reduce its key interest rate Thursday for the first time since March 2018, starting a series of cuts that economists forecast could total as much as 75 basis points over six months. That would support a fragile recovery in sales and consumer confidence by loosening the cost of debt.

Rhinos come to the bond market, and other species may follow

Bloomberg

The planned sale of a rhino impact bond, aimed at growing the population of the endangered black rhino, is seen by its backers as a test for the creation of a conservation debt market that could be used for everything from protecting species facing extinction to preserving wildlife areas.

The sale next year of the $50m bond, the first financial instrument for species conservation, is being run by the Zoological Society of London and Conservation Capital. The company was founded in Kenya about 15 years ago seeking to create business and investment finance tools for conservation.